Investors Should a Consider Gladstone Investment Preferred Exit

After thoughtful consideration we have exited our sizable personal position (around 1000 shares) of the Gladstone Investment 6.25% Term Preferred shares (NASDAQ:GAINM).

Investors are aware that GAIN recently called for redemption of their 6.50% (GAINN) and 6.75% (GAINO) term preferreds for 8/31. The company did this through the issuance of a 6.375% term preferred issue (NASDAQ:GAINL).

The company (a business development company) did this because both issues required asset coverage ratios of 200% and with law changes and a board of directors vote the company will be only required to have a 150% asset coverage ratio of senior securities effective on April 10, 2019. While we don’t agree with reductions in asset coverage ratios as this will raise our risk when the economy softens, but it is what it is and we have to make the best of it.

Why did we exit the GAINM issue? Simply because it contains the same terms as the GAINO and GAINN requiring 200% asset coverage ratio and it makes no sense to redeem the other 2 issues and not redeem the 3rd issue since the singular issue outstanding would require the maintenance of the higher asset coverage ratio. Additionally we have captured the August dividend as well as 2 more dividends by selling in the $25.25 area. This issue becomes redeemable on September 30, 2018 (in 1 month) and we believe they may well call it for that date meaning only 1 addition dividend (a monthly dividend) will be paid.

Investors should be aware that they have the time frame of 9/30/18 until 4/10/2019 to redeem the shares and still be able to apply the lowered leverage ration, but with rates highly probable to rise in the months ahead we think they will want to get this done sooner rather than later.

Will they redeem a 6.25% issue by issuing a 6.375% issue? We think this is not a very relevant issue. The increase in dividend cost is virtually nothing at all–we are talking $65,000 annually on a $50,000,000 issue (2 million or so shares). The increment leverage available to the company will have ‘earning power’ of over 100 times (or some such huge number) the increased dividend cost.

Will the company issue more preferred stock for this redemption? Probably will eventually but the company has had no problem raising money with stock sales and they have just raised their revolver to $200,000,000 which may be expanded to $300,000,000 (as seen here) and they only had $102 million outstanding on the revolver on 6/30 so raising money will be no issue whatsoever.

I believe Grid is correct in saying you will never have a shot at the CNP preferred. If you do, it will be over the bond desk, not an exchange.

To broaden the point, appreciate that many (most?) bonds and preferreds are not sold directly to the public. Which is a shame, since the non-public issues generally have better terms/rates than the public issues.

That said, you can but the non-public issues if you pay the toll, which is to say buy them as part of a fund. The very same securities that you can’t buy directly you can buy indirectly through a fund. Dear SEC: This is total nonsense. You are protecting no one and robbing the investing public.

For the above reasons I own substantial amounts of preferred CEFs in addition to issues I own individually. It’s the only way to get in on the private action (OEFs and ETFs, too). If you chose the “right” CEFs, the advisor fee is more than covered by the returns.

Stonebridge Advisors is one of the best “big picture” sites on preferred stocks.
They have good articles in their literature section. No recommendations on individual securities but good 30,000 foot descriptions of what’s happening.
Their site confirms that there are more institutional preferreds issued than retail preferreds. This probably has something to do with DRD treatment of
dividends from securities owned by C corporations. Also institutional holders don’t trade in and out on interest rate speculations like many retail investors do. Hence, less volatile pricing.

The institutional market is growing currently while retail is shrinking. Also floating issues are currently increasing in number.

Are your holdings of 1000 par value securities actually in preferred stocks or are they in notes or bonds? In my experience retail investors can purchase
bonds or notes although it is more cumbersome – both in buying and selling –
than buying $25 par retail exchanged traded securities. As I see it exchange traded securities are tailor made for retail investors.

Typically 1000 par preferreds have very large issuances (number of shares @IPO) and are tailor made for institutional owners.

I do think there are funds out there that offer retail investors a chance to indirectly own 1000 par value preferreds, but doubt there’s much of a way for small
retail investors to participate directly.

The Stonebridge site – BTW – highlights the fact that in today’s environment
there are also Exchange Traded Funds that have significant ownership of
$25 par retail preferreds – think preferred index funds.

Such holdings aggravate price volatility when whiffs of interest rates making possible directional changes occur along with trading activity by direct retail holders of such securities at those times.

Stonebridge’s FPF fund is one of 5 CEFs I rotate in and out of based on relative pricing. The fund is notable for its high percentage of fixed-to-float issues, most of which I can’t buy directly. So it is good diversification in a convenient wrapper.

The three I referenced are all bank preferred issues with $1000 par values. I own 10 of each. As I said, I also own individual corporate bonds (10 of each issue) which are also $1000 bonds. The bonds don’t pay a lot but they are all rated BBB+ or better and I keep maturities laddered out to 16 months or less. They pay a little better than my 1 year laddered CD’s. I’m trying not to get to fancy here. The juice in my portfolio comes from the baby bonds and preferred issues often mentioned here on Tim’s website.

Yes Razor, C Corps get an advantagous tax treatment. I was wondering if the Trump tax cut would curtail desires of such issues, but I guess not… Yes there are a few $1000 par preferreds tradeable, which I have. I suspect their genesis was institutional then a trading ticker was assigned later. The WFC-L and BAC-L issues do trade fairly often and the MTB-, and MTB-C issues do on a less frequent basis.

I see that CenterPoint Energy has a $1000 par cumulative perpetual fixed to float 6.125% preferred with a 3.27% Libor float after 9/2023, redeemable after 9/2023 for $1020. I haven’t seen too many $1000 par value preferred. Any thoughts for a buy and hold investor on this one ?

Retired, I cant say with certainty, but this looks exactly others I have seen. The underwriting appeared set up for institutional purchasing only and will never see the light of day for retail investors. Many dont relize this but the majority of preferred dollars issued goes “private or institutional” instead of retail market…
Something you want to consider is a different utility baby bond from Wisconsin Energy and call bond desk on at some time is the old delisted IEH issue (look it up under Quantumonline). Its a delisted baby bond tossed to the bond desk. A very solid Baa2. It goes floatable at libor plus 3.22% in 2023.

Hi Retired–never owned a $1000 issue as I am more concerned with liquidty of these types of issues.

As Grid mentioned most preferreds and a huge number of bonds are simply sold to institutional holders and we never ever see them. Can’t tell you how many issues I run across reading SEC filings that look good until I find out they are purely institutional issues–then I cuss.

Tim, I hope this isnt how it really goes…..”Guys should we issue this for institutional purchases or send it out to the public markets?”……”Well Boss, sorry but the institutions are going to buy this crap, so we need to send to retail investors as those gullible fools will buy anything with a yield attached to it…. ?

Ha Ha! Thanks for the laugh Grid. Tim, I do own a ladder of $1000 par (10 shares each) investment grade corporates and I space maturities one month apart ( out to 12/2019 as of now) so I always have something to roll. Can’t really do that with preferred stock. And I miss spoke earlier about not seeing $1000 preferred issues…I own three already: MTB/PC, BAC/PL, and WFC/PL. I actually like the big par values. Hopefully this CNP issues list on the OTC.

Retired, I just dont think it will ever trade…This copied from prospectus.

No Public Trading Market
The Series A Preferred Stock is a new issue of securities with no established trading market. We do not intend to list the Series A Preferred Stock on any national securities exchange or to arrange for quotation on any automated dealer quotation systems. There can be no assurance that an active trading market will develop for the Series A Preferred Stock.

Maybe some will leak out into the grey market at some point. This is how I snagged my FIISO.

Tim, here is a perfect example of how the big boys get all the good deals and leave us the crumbs…Take my JBK that I referenced a couple days ago. I just looked at the JBK filings….Origen Phoenix a supposed “private investment company” offers a 3rd party unsolicited tender for the JBK shares at $26.50 with 8/6. So according to the just issued filings, about 45% of the 25 million shares were tendered to them, leaving about 13 million outstanding. Well these shares werent bought to be held. They bought and redeemed…So why is that a big deal? Because they pay about a 6% premium to get 6.345% bonds given to them at par and now hold the bonds at an instant 11% profit as the bonds are trading 17% over par. Who knows they might have had some back door agreement with Goldman Sachs to redeem them and get them off the market. As Goldman has managed to get over half of this 2 plus billion bond filing off the market with a “made whole” clause attached to them.

Grid, so now that the pool of JBK shares has been reduced to 13 million, would that not imply a possibility for Origen ( or another company ) to do another tender for the rest – hopefully at a higher price?

In any case, shrinkage of outstanding shares is a positive event, could lead to higher prices in future.

Inspbudget, I dont even understand how they were able to offer a tender, let alone redeem them. Lehman does not exist, Barclays has some of its operation but obviously has no authortity or they would have redeemed at par and sold off the bonds with even more of a profit. If this outfit can do this why cant we tender our shares to trust and get in on the spoils too?
I bet Goldman is lurking somewhere in on this too. The propsectus is way to complicated for me to understand this….But my numbers were wrong…They scalped even more…Yes they tendered at $26.50, but they got to keep the 79 cent interest payment also that came along with it I am sure. So they basically paid a 3% premium to scalp a 17% premium on the bonds they got at par.
Who knows if another tender happens but it sure is easy money for someone if they tendered again at $26.50.

Inspbudget, I played small ball today in a manner only Tim could appreciate. Bought 200 shares of CNIGO at 26.35 and 100 at 26.69. I humored myself and checked. This thing has only traded about 25 times since it was issued almost 3 years ago. Most are held by 3 or 4 people so it doesnt have much liquidity. I looked and I have been involved in about 2/3 of the transactions either buying or selling, lol.

I dont mind owning some safer lower yielding term dated stuff. The key is just to scan daily and see if the ask price changed. If it is ever lowered that means there are some shares in play. I noticed the long standing $27 was lowered to $26.75 this morning. So I put in a bid for 200 at 26.35 and it hit about 2 hours later. Should have put 300 out, but it was only showing 100 shares. The 26.75 remained the ask, but they wouldnt bite on another 26.35 play. So after a few hours and going to 26.65 we both nudged 2 cents a piece two times and met at the middle of 26.69. It showed briefly 850 shares at 28.50, so those might trickle down to a buyable price in time. It does go exD next month, but I wasnt willing to go higher than what I did. If I didnt have the first 200 I might not have tried for the last. I went for 200 more, but they only gave me 100 on last lot so that seller was dried up.